SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 |
| For the quarterly period ended June 30, 2003 |
Commission File Number 005-62335
HAMPTON ROADS BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
| Virginia | 54-2053718 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 201 Volvo Parkway, Chesapeake, VA | 23320 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (757) 436-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of June 30, 2003.
| Common Stock, $.625 Par Value | 7,800,642 Shares |
HAMPTON ROADS BANKSHARES, INC.
TABLE OF CONTENTS
2
HAMPTON ROADS BANKSHARES, INC.
| June 30, 2003 (Unaudited) |
December 31, 2002 (Audited) |
|||||||
| Assets: |
||||||||
| Cash and due from banks |
$ | 19,837,738 | $ | 7,939,519 | ||||
| Overnight funds sold |
13,076,590 | 33,105,061 | ||||||
| 32,914,328 | 41,044,580 | |||||||
| Securities available-for-sale, at fair market value |
52,091,321 | 43,738,985 | ||||||
| Federal Home Loan Bank stock |
875,000 | 685,000 | ||||||
| Federal Reserve Bank stock |
635,950 | 631,100 | ||||||
| 53,602,271 | 45,055,085 | |||||||
| Loans |
210,093,929 | 203,183,511 | ||||||
| Allowance for loan losses |
(2,820,523 | ) | (2,842,855 | ) | ||||
| Net loans |
207,273,406 | 200,340,656 | ||||||
| Premises and equipment |
8,246,373 | 8,431,209 | ||||||
| Interest receivable |
1,245,862 | 1,278,851 | ||||||
| Real estate acquired in settlement of loans |
458,358 | 457,845 | ||||||
| Deferred tax assets |
583,298 | 962,436 | ||||||
| Other assets |
1,163,017 | 1,143,738 | ||||||
| Total assets |
$ | 305,486,913 | $ | 298,714,400 | ||||
| Liabilities and shareholders’ equity: |
||||||||
| Deposits: |
||||||||
| Noninterest bearing demand |
$ | 69,718,787 | $ | 62,667,737 | ||||
| Interest bearing: |
||||||||
| Demand |
57,319,619 | 58,407,499 | ||||||
| Savings |
12,489,649 | 10,684,436 | ||||||
| Time deposits: |
||||||||
| Less than $100,000 |
70,337,226 | 70,630,990 | ||||||
| $100,000 or more |
33,441,784 | 41,483,080 | ||||||
| Total deposits |
243,307,065 | 243,873,742 | ||||||
| Interest payable |
470,006 | 535,811 | ||||||
| Other liabilities |
2,288,598 | 2,201,075 | ||||||
| Other borrowings |
19,245,000 | 12,992,853 | ||||||
| Total liabilities |
265,310,669 | 259,603,481 | ||||||
| Shareholders’ equity: |
||||||||
| Common stock, $.625 par value. Authorized 40,000,000 shares; issued and outstanding 7,800,642 shares in 2003 and 7,707,744 shares in 2002 |
4,875,401 | 4,817,340 | ||||||
| Capital surplus |
18,276,658 | 17,788,739 | ||||||
| Accumulated other comprehensive income |
1,204,159 | 598,774 | ||||||
| Retained earnings |
15,820,026 | 15,906,066 | ||||||
| Total shareholders’ equity |
40,176,244 | 39,110,919 | ||||||
| Total liabilities and shareholders’ equity |
$ | 305,486,913 | $ | 298,714,400 | ||||
See accompanying notes to the consolidated financial statements (unaudited).
3
HAMPTON ROADS BANKSHARES, INC.
Consolidated Statements of Income (Unaudited)
| Three Months Ended |
Six Months Ended | |||||||||||
| June 30, 2003 |
June 30, 2002 |
June 30, 2003 |
June 30, 2002 | |||||||||
| Interest income: |
||||||||||||
| Loans, including fees |
$ | 3,961,668 | $ | 3,832,013 | 7,828,338 | $ | 7,530,815 | |||||
| Investment securities |
445,177 | 431,119 | 912,626 | 647,788 | ||||||||
| Overnight funds sold |
13,459 | 46,878 | 42,795 | 118,499 | ||||||||
| Total interest income |
4,420,304 | 4,310,010 | 8,783,759 | 8,297,102 | ||||||||
| Interest expense: |
||||||||||||
| Deposits: |
||||||||||||
| Demand |
104,566 | 167,801 | 224,720 | 307,227 | ||||||||
| Savings |
22,222 | 27,629 | 43,587 | 55,067 | ||||||||
| Time deposits: |
||||||||||||
| Less than $100,000 |
642,887 | 807,372 | 1,340,603 | 1,649,551 | ||||||||
| $100,000 or more |
227,721 | 298,553 | 473,889 | 590,145 | ||||||||
| Other borrowings |
120,345 | 70,318 | 221,699 | 76,842 | ||||||||
| Total interest expense |
1,117,741 | 1,371,673 | 2,304,498 | 2,678,832 | ||||||||
| Net interest income |
3,302,563 | 2,938,337 | 6,479,261 | 5,618,270 | ||||||||
| Provision for loan losses |
84,000 | 123,000 | 169,000 | 222,000 | ||||||||
| Net interest income after provision for loan losses |
3,218,563 | 2,815,337 | 6,310,261 | 5,396,270 | ||||||||
| Noninterest income: |
||||||||||||
| Service charges on deposit accounts |
545,579 | 420,378 | 1,047,371 | 790,662 | ||||||||
| ATM surcharge fees |
53,353 | 63,972 | 101,945 | 122,759 | ||||||||
| Other service charges and fees |
242,213 | 224,680 | 505,971 | 404,348 | ||||||||
| Total noninterest income |
841,145 | 709,030 | 1,655,287 | 1,317,769 | ||||||||
| Noninterest expense: |
||||||||||||
| Salaries and employee benefits |
1,486,903 | 1,302,655 | 2,925,772 | 2,600,672 | ||||||||
| Occupancy |
210,693 | 228,274 | 439,606 | 458,271 | ||||||||
| Data processing |
107,912 | 101,945 | 212,175 | 198,289 | ||||||||
| Other |
677,630 | 651,208 | 1,342,663 | 1,186,062 | ||||||||
| Total noninterest expense |
2,483,138 | 2,284,082 | 4,920,216 | 4,443,294 | ||||||||
| Income before provision for income taxes |
1,576,570 | 1,240,285 | 3,045,332 | 2,270,745 | ||||||||
| Provision for income taxes |
536,546 | 419,988 | 1,034,896 | 770,345 | ||||||||
| Net income |
$ | 1,040,024 | $ | 820,297 | $ | 2,010,436 | $ | 1,500,400 | ||||
| Basic earnings per share |
$ | 0.13 | $ | 0.11 | $ | 0.26 | $ | 0.20 | ||||
| Diluted earnings per share |
$ | 0.13 | $ | 0.10 | $ | 0.25 | $ | 0.19 | ||||
| Basic weighted average shares outstanding |
7,786,395 | 7,614,576 | 7,760,628 | 7,554,808 | ||||||||
| Effect of dilutive stock options |
224,859 | 234,970 | 226,725 | 229,006 | ||||||||
| Diluted weighted average shares outstanding |
8,011,254 | 7,849,546 | 7,987,353 | 7,783,814 | ||||||||
See accompanying notes to the consolidated financial statements (unaudited).
4
HAMPTON ROADS BANKSHARES, INC.
Consolidated Statements of Shareholders’ Equity
Six Months Ended June 30, 2003, and the Years Ended 2002 and 2001
| Common Stock |
Capital Surplus |
Retained |
Accumulated Other Comprehensive Income |
Total |
||||||||||||||||||
| Shares |
Amount |
|||||||||||||||||||||
| (Audited) |
||||||||||||||||||||||
| Balance at January 1, 2001 |
7,496,426 | $ | 4,685,266 | $ | 16,222,904 | $ | 13,300,884 | — | $ | 34,209,054 | ||||||||||||
| Shares issued related to: |
||||||||||||||||||||||
| 401(k) plan |
9,189 | 5,743 | 67,770 | — | — | 73,513 | ||||||||||||||||
| Exercise of stock options |
12,495 | 7,810 | 56,541 | — | — | 64,351 | ||||||||||||||||
| Payout of fractional shares |
(44 | ) | (28 | ) | (410 | ) | — | — | (438 | ) | ||||||||||||
| Tax benefit of stock option exercises |
— | — | 22,759 | — | — | 22,759 | ||||||||||||||||
| Net income |
— | — | — | 3,130,311 | — | 3,130,311 | ||||||||||||||||
| Cash dividends ($0.25 per share) |
— | — | — | (1,876,571 | ) | — | (1,876,571 | ) | ||||||||||||||
| Balance at December 31, 2001 |
7,518,066 | 4,698,791 | 16,369,564 | 14,554,624 | — | 35,622,979 | ||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||
| Net income |
— | — | — | 3,298,035 | — | 3,298,035 | ||||||||||||||||
| Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $308,460 |
— | — | — | — | 598,774 | 598,774 | ||||||||||||||||
| Total comprehensive income |
— | — | — | — | — | 3,896,809 | ||||||||||||||||
| Shares issued related to: |
||||||||||||||||||||||
| 401(k) plan |
8,516 | 5,323 | 62,807 | — | — | 68,130 | ||||||||||||||||
| Exercise of stock options |
103,187 | 64,492 | 554,845 | — | — | 619,337 | ||||||||||||||||
| Dividend reinvestment |
142,960 | 89,350 | 1,120,091 | — | — | 1,209,441 | ||||||||||||||||
| Payout of fractional shares |
(67 | ) | (43 | ) | (518 | ) | — | — | (561 | ) | ||||||||||||
| Common stock repurchased and surrendered |
(64,918 | ) | (40,573 | ) | (478,767 | ) | — | — | (519,340 | ) | ||||||||||||
| Tax benefit of stock option exercises |
— | — | 160,717 | — | — | 160,717 | ||||||||||||||||
| Cash dividends ($0.26 per share) |
— | — | — | (1,946,593 | ) | — | (1,946,593 | ) | ||||||||||||||
| Balance at December 31, 2002 |
7,707,744 | 4,817,340 | 17,788,739 | 15,906,066 | 598,774 | 39,110,919 | ||||||||||||||||
| (Unaudited) |
||||||||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||
| Net income |
— | — | — | 2,010,436 | — | 2,010,436 | ||||||||||||||||
| Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $311,865 |
— | — | — | — | 605,385 | 605,385 | ||||||||||||||||
| Total comprehensive income |
— | — | — | — | — | 2,615,821 | ||||||||||||||||
| Shares issued related to: |
||||||||||||||||||||||
| 401(k) plan |
9,192 | 5,745 | 67,791 | — | — | 73,536 | ||||||||||||||||
| Exercise of stock options |
121,214 | 75,758 | 477,766 | — | — | 553,524 | ||||||||||||||||
| Dividend reinvestment |
14,886 | 9,304 | 131,149 | — | — | 140,453 | ||||||||||||||||
| Payout of fractional shares |
(48 | ) | (30 | ) | (428 | ) | — | — | (458 | ) | ||||||||||||
| Common stock repurchased and surrendered |
(52,346 | ) | (32,716 | ) | (470,139 | ) | — | — | (502,855 | ) | ||||||||||||
| Tax benefit of stock option exercises |
— | — | 281,780 | — | — | 281,780 | ||||||||||||||||
| Cash dividends ($0.27 per share) |
— | — | — | (2,096,476 | ) | — | (2,096,476 | ) | ||||||||||||||
| Balance at June 30, 2003 |
7,800,642 | $ | 4,875,401 | $ | 18,276,658 | $ | 15,820,026 | $ | 1,204,159 | $ | 40,176,244 | |||||||||||
See accompanying notes to the consolidated financial statements (unaudited).
5
HAMPTON ROADS BANKSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
| Six Months Ended |
||||||||
| June 30, 2003 |
June 30, 2002 |
|||||||
| Operating activities: |
||||||||
| Net income |
$ | 2,010,436 | $ | 1,500,400 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
269,317 | 257,986 | ||||||
| Provisions for loan losses |
169,000 | 222,000 | ||||||
| Net amortization of premiums and accretion of discounts on investment securities |
(221,832 | ) | (144,214 | ) | ||||
| Gain on sale of premises and equipment |
— | (1,974 | ) | |||||
| Deferred tax assets |
67,273 | (56,022 | ) | |||||
| Changes in: |
||||||||
| Interest receivable |
32,989 | (205,875 | ) | |||||
| Other assets |
(35,754 | ) | (220,632 | ) | ||||
| Interest payable |
(65,805 | ) | (20,588 | ) | ||||
| Other liabilities |
656,911 | 412,039 | ||||||
| Net cash provided by operating activities |
2,882,535 | 1,743,120 | ||||||
| Investing activities: |
||||||||
| Proceeds from maturities and calls of securities |
19,586,746 | 14,253,186 | ||||||
| Purchase of securities |
(26,800,000 | ) | (37,130,000 | ) | ||||
| Purchase of Federal Home Loan Bank stock |
(190,000 | ) | (500,000 | ) | ||||
| Purchase of Federal Reserve Bank stock |
(4,850 | ) | (650 | ) | ||||
| Net increase in total loans |
(7,101,750 | ) | (5,643,691 | ) | ||||
| Purchase of premises and equipment |
(68,006 | ) | (48,787 | ) | ||||
| Cash proceeds from sale of premises and equipment |
— | 8,741 | ||||||
| Cash received from rental income (paid for) development and and improvement of real estate acquired in settlement of loans |
(513 | ) | 11,349 | |||||
| Net cash used in investing activities |
(14,578,373 | ) | (29,049,852 | ) | ||||
| Financing activities: |
||||||||
| Net increase (decrease) in deposits |
(566,677 | ) | 22,987,132 | |||||
| Net increase in other borrowings |
6,252,147 | 6,770,000 | ||||||
| Common stock repurchased and surrendered |
(502,855 | ) | (519,340 | ) | ||||
| Dividends reinvested |
140,453 | 1,209,440 | ||||||
| Proceeds from shares issued related to 401(k) plan |
73,536 | 68,130 | ||||||
| Cash proceeds from exercise of stock options |
265,458 | 137,938 | ||||||
| Dividends paid |
(2,096,476 | ) | (1,946,593 | ) | ||||
| Net cash used in financing activities |
3,565,586 | 28,706,707 | ||||||
| Increase (decrease) in cash and cash equivalents |
(8,130,252 | ) | 1,399,975 | |||||
| Cash and cash equivalents at beginning of period |
41,044,580 | 26,965,095 | ||||||
| Cash and cash equivalents at end of period |
$ | 32,914,328 | $ | 28,365,070 | ||||
| Supplemental cash flow information: |
||||||||
| Cash paid during the period for interest |
$ | 2,370,303 | $ | 2,699,420 | ||||
| Cash paid during the period for income taxes |
965,000 | 765,000 | ||||||
| Supplemental noncash information: |
||||||||
| Dividends declared |
— | 1,943,613 | ||||||
| Value of shares exchanged in exercise of stock options |
310,178 | — | ||||||
| Stock options exercised through reduction in stock options payable |
287,608 | 81,492 | ||||||
| Tax benefit of stock option exercises |
281,780 | 51,581 | ||||||
See accompanying notes to the consolidated financial statements (unaudited).
6
HAMPTON ROADS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2003
NOTE A – BASIS OF PRESENTATION
Hampton Roads Bankshares, Inc., a Virginia corporation (the “Holding Company”), was incorporated under the laws of the Commonwealth of Virginia on February 28, 2001, primarily to serve as a holding company for Bank of Hampton Roads (the “Bank”). The consolidated financial statements of Hampton Roads Bankshares, Inc. (the “Company”) include the accounts of the Holding Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances have been eliminated in consolidation.
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.
The Financial Accounting Standards Board has issued Statements of Financial Accounting Standards (“SFAS”) Nos. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”: and 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities”. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. SFAS No. 150 is effective beginning July 1, 2003. Adoption of these statements is not expected to have a material impact on the Company’s financial statements.
NOTE B – SECURITIES
The amortized cost and estimated fair market values of securities available-for-sale were:
| June 30, 2003 |
December 31, 2002 | |||||||||||
| Amortized Cost |
Estimated Market Value |
Amortized Cost |
Estimated Market Value | |||||||||
| U.S. Agency securities |
$ | 50,248,774 | $ | 52,073,234 | $ | 42,811,920 | $ | 43,719,063 | ||||
| Mortgage backed securities |
18,063 | 18,087 | 19,831 | 19,922 | ||||||||
| Total securities available-for-sale |
$ | 50,266,837 | $ | 52,091,321 | $ | 42,831,751 | $ | 43,738,985 | ||||
NOTE C – LOANS
Major classifications of loans are summarized as follows:
| June 30, 2003 |
December 31, 2002 | |||||
| Commercial |
$ | 56,506,394 | $ | 53,842,424 | ||
| Construction |
43,803,617 | 35,969,610 | ||||
| Real estate-commercial mortgage |
68,733,142 | 62,610,803 | ||||
| Real estate-residential mortgage |
22,756,584 | 28,505,370 | ||||
| Installment loans to individuals |
18,224,121 | 22,217,230 | ||||
| Deferred loan fees and related costs |
70,071 | 38,074 | ||||
| Total loans |
$ | 210,093,929 | $ | 203,183,511 | ||
7
Non-performing assets are as follows:
| June 30, 2003 |
December 31, 2002 |
|||||||
| Loans 90 days past due and still accruing interest |
$ | 122,401 | $ | 197,054 | ||||
| Nonaccrual loans |
151,749 | 78,443 | ||||||
| Real estate acquired in settlement of loans |
458,358 | 457,845 | ||||||
| Total non-performing assets |
$ | 732,508 | $ | 733,972 | ||||
| Allowance as a percentage of non-performing assets |
385 | % | 387 | % | ||||
| Non-performing assets as a percentage of total loans |
0.35 | % | 0.36 | % | ||||
NOTE D – ALLOWANCE FOR LOAN LOSSES
Transactions affecting the allowance for loan losses during the six months ended June 30, 2003 and 2002 were as follows:
| 2003 |
2002 |
|||||||
| Balance at beginning of year |
$ | 2,842,855 | $ | 2,121,137 | ||||
| Provision for loan losses |
169,000 | 222,000 | ||||||
| Loans charged off |
(204,471 | ) | (131,167 | ) | ||||
| Recoveries |
13,139 | 32,350 | ||||||
| Balance at end of period |
$ | 2,820,523 | $ | 2,244,320 | ||||
NOTE E – PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
| June 30, 2003 |
December 31, 2002 |
|||||||
| Land |
$ | 3,213,052 | $ | 2,860,152 | ||||
| Buildings and improvements |
5,708,181 | 5,050,549 | ||||||
| Equipment, furniture and fixtures |
3,799,544 | 3,742,070 | ||||||
| 12,720,777 | 11,652,771 | |||||||
| Less accumulated depreciation |
(3,474,404 | ) | (3,221,562 | ) | ||||
| Net premises and equipment |
$ | 9,246,373 | $ | 8,431,209 | ||||
| ITEM 2 – | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Hampton Roads Bankshares, Inc., a Virginia corporation, was incorporated under the laws of the Commonwealth of Virginia on February 28, 2001, primarily to serve as a holding company for Bank of Hampton Roads. The consolidated financial statements of Hampton Roads Bankshares, Inc. include the accounts of the Holding Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances have been eliminated in consolidation.
Bank of Hampton Roads was organized in March of 1987 and commenced banking operations in December of 1987. The Bank engages in a general community and commercial banking business, emphasizing the needs of individuals as well as small and medium sized businesses in its primary service area.
8
The following discussion and analysis by the Company’s management compares the financial condition and results of the Company’s operations for the six months and three months ended June 30, 2003 and June 30, 2002. The following should be read in conjunction with the Company’s 2002 Annual Report.
Financial Condition
The first six months of 2003 proved to be very successful for Hampton Roads Bankshares, Inc., with average assets increasing an additional $27.0 million over the 2002 average balance, to a new record of $292.5 million. The Company’s total assets at June 30, 2003 reached a new high of $305.5 million, up $6.8 million or 2.3% from $298.7 million on December 31, 2002.
The Company’s primary market objective focuses on generating construction, real estate, consumer and commercial loans to small and medium sized businesses as well as individuals. The loan portfolio grew $6.9 million to a record $210.1 million on June 30, 2003 from $203.2 million on December 31, 2002. Average loans for the first six months of 2003 increased $14.6 million from the average in 2002 to a record $209.1 million. An emphasis has been placed on maintaining the diversification of the loan portfolio with respect to loan type, nature of collateral and geographic location. This emphasis has resulted in success, with no one loan type holding a disproportionately large percentage of the overall loan portfolio. Asset quality has continued to be strong for all loans. The allowance for loan losses on June 30, 2003 was $2.8 million, or 1.34% of outstanding loans. Loan charge-offs, net of recoveries, were $191,332 for the first six months of 2003. Based upon management’s review of historical trends and the estimate of losses inherent in the portfolio, it considers the allowance to be adequate.
In the first six months of 2003, the Company has experienced a $18.9 million or 8.6% increase in average deposits from the average 2002 balance to a new high of $237.2 million. Total deposits decreased from $243.9 million at December 31, 2002 to $243.3 million at June 30, 2003, a decrease of $0.6 million or 0.2%. Significant changes in the major categories of deposits include a $7.1 million increase in the noninterest bearing demand from December 31, 2002 to June 30, 2003, and a $8.0 million decrease in time deposits $100,000 or more. This positive growth trend in average deposits can be attributed to several factors: a change in the local community banking marketplace as three respected competitors were acquired by larger institutions, efforts of experienced personnel to attract new accounts and increased advertising highlighting the Bank’s heritage and its commitment to extending excellent customer service. As the Company grows it will continue to seek core deposits as they are the main source of funds for the Company’s earning assets.
The Company’s investment portfolio, consisting primarily of U.S. Agency securities, serves as a source of liquidity to fund future loan growth and to meet the necessary collateral requirements for public funds on deposit. The investment portfolio was $53.6 million or 17.5% of total assets on June 30, 2003 compared to $45.1 million or 15.1% of total assets on December 31, 2002. Overnight funds sold are temporary investments used for daily cash management purposes, as well as management of short-term interest rate opportunities and interest rate risk. Overnight funds sold decreased by $20.0 million or 60.5% at June 30, 2003 compared to December 31, 2002. The increase in investments and decline in overnight funds sold was due to the purchase of $26.8 million in investment securities, net of investment calls/ maturities of $19.6 million in the first six months of 2003.
Premises and equipment has decreased through the first six months of 2003, by a net amount of $184,836 due to depreciation of $252,842 offset by fixed asset purchases of $68,006.
Results of Operations
During the first six months of 2003, the Company had net income of $2.0 million, resulting in a return of 1.39% on average total assets of $292.5 million. During the comparable period in 2002, the Company earned $1.5 million resulting in a return of 1.22% on average total assets of $247.2 million. Net income for the three months ended June 30, 2003 increased 26.8% to $1.0 million as compared to the three months ended June 30, 2002. Diluted earnings per share increased 31.6% to $0.25 per share for the first six months of 2003 and 30.0% to $.13 per share for the three months ended June 30, 2003, as compared to the same periods in 2002.
9
Net interest income, the principal source of the Company’s earnings, represents the difference between interest and fees earned from lending and investment activities and the interest paid to fund these activities. Variations in the volume and mix of assets and liabilities and their relative sensitivity to interest rate movements impact net interest income.
Due to the low interest rate environment, loan yields declined, however, our strong loan demand led to a record increase in the average loan volume, and sustained the Company’s earnings. Interest income on loans increased $298 thousand in the first six months of 2003 to $7.8 million from $7.5 million for the six months ended June 30, 2002. For the three months ended June 30, 2003, interest income on loans increased $130 thousand or 3.4% as compared to the same period in 2002. As a result of a $29.1 million or 108.7% increase in average investment securities net of a decrease in average yields from 4.88% for the first six months of 2002 compared to 3.29% for the first six months of 2002, interest income on investment securities increased by $264,838 or 40.9% for the first six months of 2003 as compared to the same time period in the prior year. For the three months ended June 30, 2003, average investment securities increased $17.6 million, and interest income on investment securities increased $14,058 or 3.3% as compared to the three months ended June 30, 2002. Interest on overnight funds sold decreased $75,704 for the first six months of 2003 and $33,419 in the three months ended June 30, 2003, as compared to the same period in 2002, due to declining interest rates, as well as the impact of a 45.1% decrease in the average year to date balance for the period ended June 30, 2003, as compared to the same period in 2002.
Interest expense on deposits and borrowings decreased in 2003 by $374,334, or 14.0%, when compared to the same six month period in 2002. For the three months ended June 30, 2003, interest expense on deposits and borrowings decreased $253,932 or 18.5% as compared to the three months ended June 30, 2002. This decrease is due to the decrease in overall rates paid on liabilities, as a result of the lower interest rate environment, which was partially offset by the record increase in the Company’s average interest bearing liabilities.
The net interest margin, which is calculated by expressing net interest income as a percentage of average interest earning assets, is an indicator of the Company’s efficiency in generating income from earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competition and the economy. The Company’s net interest margin decreased from 4.95% during the first six months of 2002 to 4.80% for the same period in 2003. This decrease can be attributed to changes in the balance sheet mix, changes in the yields obtained from interest earning assets and paid on interest bearing liabilities, the falling interest rate environment, and changes in volume.
Noninterest income increased by $337,518, or 25.6% in the first six months of 2003 from $1.3 million for the period ended June 30, 2002 to $1.7 million for the period ended June 30, 2003. Service charges on deposit accounts, representing 63.3% of total noninterest income, for the six months ended June 30, 2003, increased $256,709 or 32.5% from 2002 to 2003. This increase is primarily due to the additional number of accounts being serviced by the Bank, an increase in fees associated with new products offered, as well as the change in the economy, which has presented financial challenges for some customers and lead to an increase in returned check fees. ATM surcharge fees declined $20,814 or 17.0% in the first half of 2003 as compared to the same period in 2002 due to closing one of our ATM locations. Other service charges and fees, which include late charges, cashiers check fees, credit card fees, ATM network and VISA check card fees, safe deposit box rentals and dividends, increased $101,623 or 25.1% in 2003. This increase is largely due to a $50 thousand dividend received from an affiliate in the first quarter of 2003. For the three months ended June 30, 2003, total noninterest income increased $132,115 or 18.6% as compared to the same period in 2002. Service charges on deposit accounts increased $125,201 or 29.8% in the same period due to the increase in the number of deposit accounts. The overall increase in noninterest income is in line with the Company’s objective of increasing the share of income from noninterest sources to reduce its traditional dependence on the net interest margin.
Noninterest expense consists of salaries and benefits provided to employees of the Company, expenses related to premises and equipment, data processing expenses, and operating expenses associated with day to day business affairs. Total noninterest expense increased $476,922 or 10.7% in the first six months of 2003 when compared to the same period in 2002. For the three months ended June 30, 2003, noninterest expense increased $199,056 or 8.7% as compared to the three months ended June 30, 2002. This increase can primarily be attributed to a 12.5% increase in
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salaries and benefits for the six month period resulting from the addition of several new positions during 2002 and an increase in medical insurance costs on our employees. Advertising expense also increased due to the implementation of a new advertising campaign which began in the second quarter of 2002.
Capital Resources and Liquidity
Shareholders’ equity was $40.2 million or 13.2% of total assets as of June 30, 2003 as compared to $39.1 million or 13.1% as of December 31, 2002. Under Federal Reserve Bank (“FRB”) rules, the Company was considered “well-capitalized”, the highest category of capitalization defined by the regulators as of June 30, 2003. The Company’s ability to generate capital through earnings and the Dividend Reinvestment and Optional Cash Purchase Plan available to its shareholders has been exceptional. Management believes that a strong capital position is necessary to take advantage of attractive growth and investment opportunities. On April 15, 2003, the Company paid a cash dividend of $0.27 per share, totaling $2,096,476.
In December 2001, the Company implemented a Stock Repurchase Program, where the Company agreed to buy back up to 375,000 shares of its common stock at a price of $8.00 per share during the time frame of December 17, 2001 to February 14, 2002. Upon expiration of the program, 64,918 shares for a total of $519,340 were repurchased by the Company.
In January 2003, the Company repurchased 42,224 shares of its common stock in a privately negotiated transaction at a price of $9.50.
In April 2003, the Company repurchased 10,122 shares of its common stock in a privately negotiated transaction at a price of $10.05.
A key goal of asset/liability management is to maintain an adequate degree of liquidity without impairing long-term earnings. Liquidity represents the Company’s ability to provide adequate funding sources for loan growth or deposit withdrawals. Short-term liquidity is primarily provided by access to the federal funds market through established correspondent banking relationships. Funds can also be obtained through the Company’s borrowing privileges at the Federal Reserve and Federal Home Loan Bank of Atlanta. Additional liquidity is available through loan repayments and maturities of the Company’s investment portfolio. The Company maintains a very liquid portfolio of both assets and liabilities and attempts to mitigate the risk inherent in changing rates in this manner. At June 30, 2003, cash, overnight funds sold, investments in securities, and loans maturing or repricing within one year were$157.5 million or 51.6% of total assets. Management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.
Forward Looking Statements
Included in this discussion are forward-looking management comments and other statements that reflect management’s current outlook for the future. Such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements. Such risks and uncertainties include, but are not limited to, general business and economic conditions, climatic conditions, competitive pricing pressures, and product availability.
| ITEM 3 – | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest earning assets and interest bearing liabilities.
The primary goal of the Company’s asset/liability management strategy is to maximize its net interest income over time while keeping interest rate risk exposure within levels established by the Company’s management. The Company’s ability to manage its interest rate risk depends generally on the Company’s ability to match the maturities and repricing characteristics of its assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income. The principal variables that affect the Company’s management of its interest rate risk include the Company’s existing interest rate gap position,
11
management’s assessment of future interest rates, and the withdrawal of liabilities over time.
The Company’s primary technique for managing its interest rate risk exposure is the management of the Company’s interest sensitivity gap. The interest sensitivity gap is defined as the difference between the amount of interest earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that time period. At June 30, 2003, the Company’s one year “positive gap” (interest earning assets maturing or repricing within a period exceed interest bearing liabilities maturing or repricing within the same period) was approximately $4.2 million, or 1.39% of total assets. Thus, during periods of rising interest rates, this implies that the Company’s net interest income would be positively affected because the yield of the Company’s interest earning assets is likely to rise more quickly than the cost of its interest bearing liabilities. At December 31, 2002, the Company’s one year “positive gap” was approximately $4.9 million, or 1.63% of total assets.
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The following tables set forth the amounts of interest earning assets and interest bearing liabilities outstanding at June 30, 2003 and December 31, 2002 that are subject to repricing or that mature in each of the future time periods shown. Loans and securities with call or balloon provisions are included in the period in which they balloon or may first be called. Except as stated above, the amount of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the contractual terms of the asset or liability.
Interest Sensitivity Analysis
June 30, 2003
| (in thousands) |
0-3 Months |
4-12 Months |
1-3 Years |
4-5 Years |
Over 5 Years |
Total | |||||||||||||||||
| Interest earning assets: |
|||||||||||||||||||||||
| Loans |
$ | 101,605 | $ | 16,364 | $ | 37,077 | $ | 50,922 | $ | 4,126 | $ | 210,094 | |||||||||||
| Securities and stock |
3,089 | 4,568 | 23,040 | 21,376 | 1,529 | 53,602 | |||||||||||||||||
| Overnight funds sold |
13,077 | — | — | — | — | 13,077 | |||||||||||||||||
| Total interest earning assets |
$ | 117,771 | $ | 20,932 | $ | 60,117 | $ | 72,298 | $ | 5,655 | $ | 276,773 | |||||||||||
| Cumulative totals |
$ | 117,771 | $ | 138,703 | $ | 198,820 | $ | 271,118 | $ | 276,773 | |||||||||||||
| Interest bearing liabilities: |
|||||||||||||||||||||||
| Interest checking |
$ | 17,038 | $ | — | $ | — | $ | — | $ | — | $ | 17,038 | |||||||||||
| Money market |
40,282 | — | — | — | — | 40,282 | |||||||||||||||||
| Savings |
12,490 | — | — | — | — | 12,490 | |||||||||||||||||
| Time deposits |
29,667 | 28,241 | 26,550 | 19,316 | 5 | 103,779 | |||||||||||||||||
| FHLB borrowings |
— | 5,000 | 5,000 | 7,500 | — | 17,500 | |||||||||||||||||
| Other borrowings |
1,745 | — | — | — | — | 1,745 | |||||||||||||||||
| Total interest bearing liabilities |
$ | 101,222 | $ | 33,241 | $ | 31,550 | $ | 26,816 | $ | 5 | $ | 192,834 | |||||||||||
| Cumulative totals |
$ | 101,222 | $ | 134,463 | $ | 166,013 | $ | 192,829 | $ | 192,834 | |||||||||||||
| Interest sensitivity gap |
$ | 16,549 | $ | (12,309 | ) | $ | 28,567 | $ | 45,482 | $ | 5,650 | $ | 83,939 | ||||||||||
| Cumulative interest sensitivity gap |
$ | 16,549 | $ | 4,240 | $ | 32,807 | $ | 78,289 | $ | 83,939 | |||||||||||||
| Cumulative interest sensitivity gap as a percentage of total assets |
5.42 | % | 1.39 | % | 10.74 | % | 25.63 | % | 27.48 | % | |||||||||||||
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Interest Sensitivity Analysis
December 31, 2002
| (in thousands) |
0-3 Months |
4-12 Months |
1-3 Years |
4-5 Years |
Over 5 Years |
Total | |||||||||||||||||
| Interest earning assets: |
|||||||||||||||||||||||
| Loans |
$ | 89,384 | $ | 21,468 | $ | 38,955 | $ | 49,533 | $ | 3,844 | $ | 203,184 | |||||||||||
| Securities and stock |
10,379 | 1,534 | 20,752 | 11,054 | 1,336 | 45,055 | |||||||||||||||||
| Overnight funds sold |
33,105 | — | — | — | — | 33,105 | |||||||||||||||||
| Total |
$ | 132,868 | $ | 23,002 | $ | 59,707 | $ | 60,587 | $ | 5,180 | $ | 281,344 | |||||||||||
| Cumulative totals |
$ | 132,868 | $ | 155,870 | $ | 215,577 | $ | 276,164 | $ | 281,344 | |||||||||||||
| Interest bearing |
|||||||||||||||||||||||
| liabilities: |
|||||||||||||||||||||||
| Interest checking |
$ | 18,071 | $ | — | $ | — | $ | — | $ | — | $ | 18,071 | |||||||||||
| Money market |
40,337 | — | — | — | — | 40,337 | |||||||||||||||||
| Savings |
10,684 | — | — | — | — | 10,684 | |||||||||||||||||
| Time deposits |
39,209 | 34,707 | 21,709 | 16,484 | 5 | 112,114 | |||||||||||||||||
| FHLB borrowings |
— | 5,000 | 5,000 | — | — | 10,000 | |||||||||||||||||
| Other borrowings |
2,993 | — | — | — | — | 2,993 | |||||||||||||||||
| Total |
$ | 111,294 | $ | 39,707 | $ | 26,709 | $ | 16,484 | $ | 5 | $ | 194,199 | |||||||||||
| Cumulative totals |
$ | 111,294 | $ | 151,001 | $ | 177,710 | $ | 194,194 | $ | 194,199 | |||||||||||||
| Interest sensitivity gap |
$ | 21,574 | $ | (16,705 | ) | $ | 32,998 | $ | 44,103 | $ | 5,175 | $ | 87,145 | ||||||||||
| Cumulative interest sensitivity gap |
$ | 21,574 | $ | 4,869 | $ | 37,867 | $ | 81,970 | $ | 87,145 | |||||||||||||
| Cumulative interest sensitivity gap as a percentage of total assets |
7.22 | % | 1.63 | % | 12.68 | % | 27.44 | % | 29.17 | % | |||||||||||||
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The following tables provide information about the Company’s financial instruments that are sensitive to changes in interest rates as of June 30, 2003 and December 31, 2002, based on maturity or repricing dates. The Company had no derivative financial instruments, foreign currency exposure, or trading portfolio as of June 30, 2003 or December 31, 2002.
On-Balance Sheet Financial Instruments
June 30, 2003
| Principal Amount Maturing or Repricing in: | ||||||||||||||||||||||||||||
| (in thousands) |
1 Year |
2 Years |
3 Years |
4 Years |
5 Years |
Over 5 Years |
Total |
|||||||||||||||||||||
| Interest earning assets: |
||||||||||||||||||||||||||||
| Fixed rate loans |
$ | 24,895 | $ | 16,731 | $ | 20,346 | $ | 29,680 | $ | 21,242 | $ | 4,126 | $ | 117,020 | * | |||||||||||||
| Average interest rate |
7.65 | % | 8.58 | % | 8.68 | % | 7.77 | % | 7.51 | % | 8.03 | % | ||||||||||||||||
| Variable rate loans |
$ | 93,004 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 93,004 | ||||||||||||||
| Average interest rate |
5.83 | % | ||||||||||||||||||||||||||
| Securities and stock |
$ | 2,555 | $ | 11,392 | $ | 14,738 | $ | 12,994 | $ | 10,394 | $ | 1,529 | $ | 53,602 | ** | |||||||||||||
| Average interest rate |
3.06 | % | 2.84 | % | 2.94 | % | 3.74 | % | 3.57 | % | 4.82 | % | ||||||||||||||||
| Interest bearing liabilities: |
||||||||||||||||||||||||||||
| Interest checking |
$ | 17,038 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 17,038 | ||||||||||||||
| Average interest rate |
0.20 | % | ||||||||||||||||||||||||||
| Money market |
$ | 40,282 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 40,282 | ||||||||||||||
| Average interest rate |
0.93 | % | ||||||||||||||||||||||||||
| Savings |
$ | 12,490 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 12,490 | ||||||||||||||
| Average interest rate |
0.40 | % | ||||||||||||||||||||||||||
| Time deposits |
$ | 57,908 | $ | 16,080 | $ | 10,470 | $ | 5,788 | $ | 13,528 | $ | 5 | $ | 103,779 | ||||||||||||||
| Average interest rate |
2.32 | % | 4.09 | % | 5.72 | % | 4.44 | % | 4.24 | % | 5.20 | % | ||||||||||||||||
| FHLB borrowings |
$ | 5,000 | $ | 2,500 | $ | 2,500 | $ | 2,500 | $ | 5,000 | $ | — | $ | 17,500 | ||||||||||||||
| Average interest rate |
4.19 | % | 3.21 | % | 2.25 | % | 2.74 | % | 2.83 | % | ||||||||||||||||||
| Other borrowings |
$ | 1,745 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,745 | ||||||||||||||
| Average interest rate |
3.80 | % | ||||||||||||||||||||||||||
| * | Net of deferred loan costs of $70 thousand. |
| ** | Includes Federal Home Loan Bank and Federal Reserve Bank stock. |
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On-Balance Sheet Financial Instruments
December 31, 2002
| Principal Amount Maturing or Repricing in: | ||||||||||||||||||||||||||||
| (in thousands) |
1 Year |
2 Years |
3 Years |
4 Years |
5 Years |
Over 5 Years |
Total |
|||||||||||||||||||||
| Interest earning assets: |
||||||||||||||||||||||||||||
| Fixed rate loans |
$ | 28,405 | $ | 15,405 | $ | 23,550 | $ | 21,193 | $ | 28,340 | $ | 3,844 | $ | 120,737 | * | |||||||||||||
| Average interest rate |
8.01 | % | 8.80 | % | 8.94 | % | 8.57 | % | 7.48 | % | 8.34 | % | ||||||||||||||||
| Variable rate loans |
$ | 82,409 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 82,409 | ||||||||||||||
| Average interest rate |
6.06 | % | ||||||||||||||||||||||||||
| Securities and stock |
$ | 2,034 | $ | 15,350 | $ | 9,408 | $ | 12,262 | $ | 4,665 | $ | 1,336 | $ | 45,055 | ** | |||||||||||||
| Average interest rate |
5.73 | % | 2.96 | % | 3.14 | % | 3.64 | % | 4.83 | % | 5.72 | % | ||||||||||||||||
| Interest bearing liabilities: |
||||||||||||||||||||||||||||
| Interest checking |
$ | 18,071 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 18,071 | ||||||||||||||
| Average interest rate |
0.20 | % | ||||||||||||||||||||||||||
| Money market |
$ | 40,337 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 40,337 | ||||||||||||||
| Average interest rate |
1.00 | % | ||||||||||||||||||||||||||
| Savings |
$ | 10,684 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 10,684 | ||||||||||||||
| Average interest rate |
0.50 | % | ||||||||||||||||||||||||||
| Time deposits |
$ | 73,916 | $ | 10,588 | $ | 11,121 | $ | 4,763 | $ | 11,721 | $ | 5 | $ | 112,114 | ||||||||||||||
| Average interest rate |
2.84 | % | 4.43 | % | 6.03 | % | 5.23 | % | 4.67 | % | 5.44 | % | ||||||||||||||||
| FHLB borrowings |
$ | 5,000 | $ | 2,500 | $ | 2,500 | $ | — | $ | — | $ | — | $ | 10,000 | ||||||||||||||
| Average interest rate |
3.03 | % | 3.81 | % | 4.56 | % | ||||||||||||||||||||||
| Other borrowings |
$ | 2,993 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,993 | ||||||||||||||
| Average interest rate |
3.75 | % | ||||||||||||||||||||||||||
| * | Net of deferred loan costs of $38 thousand. |
| ** | Includes Federal Home Loan Bank and Federal Reserve Bank stock. |
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| ITEM 4 – | CONTROLS AND PROCEDURES |
| a) | As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings. |
| b) | There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect its internal controls subsequent to the date the Company carried out its evaluation. |
| ITEM 1 – | LEGAL PROCEEDINGS |
As of June 30, 2003, there were no significant legal proceedings against the Company.
| ITEM 2 – | CHANGES IN SECURITIES |
There were no changes in the Company’s securities during the quarter.
| ITEM 3 – | DEFAULTS UPON SENIOR SECURITIES |
There were no defaults upon senior securities during the quarter.
| ITEM 4 – | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The Company’s annual meeting of shareholders was held on April 22, 2003.
The shareholders of the Company re-elected Robert H. Powell III, Bobby L. Ralph, and Emil A. Viola as directors of the Company with 4,732,788 shares representing 63.29% of the outstanding stock voting for the election.
The shareholders of the Company voted for the election of KPMG LLP as the Company’s independent public accountants for 2003 with 4,716,757 shares or 63.08% of the outstanding stock ratifying the election.
| ITEM 5 – | OTHER INFORMATION |
None.
| ITEM 6 – | EXHIBITS AND REPORTS ON FORM 8-K |
Exhibit 31 and 32 certifications.
Form 8K- filed April 22, 2003, related to the earnings release for the quarter ended March 31, 2003, is incorporated herein by reference.
17
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HAMPTON ROADS BANKSHARES, INC.
(Registrant)
| DATE: August 14, 2003 |
/s/ CYNTHIA A. SABOL | |
| Cynthia A. Sabol Senior Vice President and Chief Financial Officer | ||
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